Fiscal sustainability 101 – Part 1

Greetings from Amsterdam where I am spending the next few days talking about what drives spatial changes in unemployment at a Tinbergen Institute regional science workshop. The spatial econometric work that I am outlining tomorrow provides the conceptual framework for the construction of the Employment Vulnerability Index, which received a lot of press earlier in the year. But while I was flying over here I thought about the concept of fiscal sustainability which is now getting a lot of press. So this is the first of a multi-part series on what constitutes a sustainable fiscal policy. Its that time again. Time to debrief!

Read more

Federal budget 2009 – ignorance will drive bad policy

As the Federal budget week approaches the various commentators and interest groups are whipping themselves into a lather about what choices the Government might have or not have. A recurring theme is whether the Government should honour its election commitment in 2007 to cut income taxes from July 2009. The debate is being constructed along the lines of whether the nation can now “afford these cuts” given the “rising debt” and the “shocking state” of the budget deficit. This debate demonstrates perfectly how bad policy can be made when the Government fails to understand its options as a monopoly issuer of a non-convertible currency.

Read more

Fiscal stimulus effects …

Opposition leader Turnbull has decided to go to the wall in opposing the $42 billion package. In particular, they want tax cuts rather than the $12.7 billion in cash handouts. He said they will not be provide economic stimulus and that December’s $10.4 billion in handouts had not worked. Soon after Turnbull provided these conclusions the ABS released the latest retail trade figures which showed that consumer spending shot up by 3.8 per cent in December, the highest monthly increase since August 2000 (since the GST came in).

Read more

The paradigm shift in economic policy

The extraordinary events in world financial markets which have undermined the basis of capitalism have led to equally amazing Government responses – massive injections of public spending, nationalisations of banks and bailouts of huge financial institutions with little regard for the relevant shareholder interests.

A major paradigm shift is occurring in economic thinking away from the free market deregulation era that has dominated since the 1970s. All the logic that justified government cut backs; the run down of public infrastructure; the harsh treatment of welfare recipients; the wasteful privatisations, and the rest of the neo-liberal litany that served to transfer wealth from poor to rich and create an disadvantaged underclass has been destroyed by these events.

Read more

Australian inflation rate falling rapidly

Today (August 28, 2024), the Australian Bureau of Statistics (ABS) released the latest – Monthly Consumer Price Index Indicator – for July 2024, which showed that the annual inflation rate has fallen from 3.8 per cent in June to 3.5 per cent in July, a significant decline which continues the downward trend. That trend has been interrupted over the last few years by transitory factors like weather events but it is clear there is not an excessive spending situation present in the Australian economy, which should end all talk of even more aggressive monetary policy (within the mainstream logic). The monthly inflation rate was zero in July even if we look at the All Groups CPI excluding volatile items (which are items that fluctuate up and down regularly due to natural disasters, sudden events like OPEC price hikes, etc). The general conclusion is that the global factors that drove the inflationary pressures are resolving and that the outlook for inflation is for continued decline. There is also evidence that the RBA has caused some of the persistence in the inflation rate through the impact of the interest rate hikes on business costs and rental accommodation.

Read more

MMT and international trade – some further considerations in a degrowth context

One of the undercurrents at the recent UK MMT Conference in Leeds was the apparent unwillingness of MMT economists to acknowledge their mistake in dealing with international trade. In our new book – Modern Monetary Theory: Bill and Warren’s Excellent Adventure (published July 2024) – we devote a chapter to this issue. There are various strands to the criticisms we receive ranging from claims we are simply wrong at the most elemental level to others claiming trade has no part in the MMT framework. All miss the point and I am surprised people have tried to make a ‘career’ (or advance their egos) on this issue. As I have noted several times in the past, the issue is nuanced but the elementary facts are not. I am now working on a section for my new book (with Dr Louisa Connors) on ‘degrowth’ and system viability from an MMT perspective and so I am linking the trade aspects of MMT with this narrative to provide further clarification of how nuanced this area of discussion can be. Here is a little glimpse of that work.

Read more

German debt brake is bad economics and undermines democracy

It’s Wednesday and today I don’t comment on the US Supreme Court decision to embed criminal behaviour in the presidency (how much of a joke will the US become) or the Presidential debate, which has focused on the performance of Biden while, seemingly ignoring the serial lies told by the other contender. If these two are all that the US has to offer as the leader then what hope is there for that nation. We will shift focus today from the idiocy of the US to the idiocy of the German government and its fiscal rules. After a temporary suspension during the pandemic, the German debt brake is being applied again and reintroduces a rigidity into fiscal policy that makes it hard for the government to actually run the economy responsibly. By prioritising an arbitrary financial threshold between good and bad, the debt brake undermines the capacity of the government to address the decaying public infrastructure (also a victim of the past austerity) and meet the climate challenges ahead. Through its negative impacts on well-being in Germany, it has also generated the political space for the right-wing extremists to gain ground. Bad all round.

Read more

Australia’s monthly inflation rate falls yet the media scream for more rate hikes

Today (June 26, 2024), the Australian Bureau of Statistics (ABS) released the latest – Monthly Consumer Price Index Indicator – for May 2024, which showed that the annual inflation rate rose 4.1 per cent, which is higher than most predicted. And now the media are beating up the story that the RBA will have to hike interest rates some more. Well if we understand the underlying movements in the components that have delivered this result, the last thing one would do is hike interest rates. If we look at the All Groups CPI excluding volatile items (which are items that fluctuate up and down regularly due to natural disasters, sudden events like OPEC price hikes, etc) then the annual inflation rate was lower at 4 per cent relative to 4.1 per cent in April. Further, the monthly rate in May revealed a lower inflation rate than the April figure, so there is no hint that we are about to see an acceleration in the overall inflation situation. Much of today’s result relates to base issues in 2023. The annualised rate over the last 12 months is 0.98 per cent – which is below the lower band of the RBA’s inflation targetting range. The general conclusion is that the global factors that drove the inflationary pressures are abating and that the outlook for inflation is for it to fall rather than accelerate. There is certainly no case that can be legitimately made for further rate hikes, although the RBA will be keen to threaten them and maintain its position at the centre of the debate, because it seems to thrive on attention.

Read more

Recent Books

Modern Monetary Theory - Bill and Warren's Excellent Adventure My latest book co-authored by fellow MMT founder Warren Mosler is now available. It was published in July 2024 by Lola Books, a Berlin-based publisher. The cover was drawn by a…

Read more

Progressive journalists in Britain so easily become willing mouthpieces for mainstream economic lies

Imagine if you are a UK Guardian reader and wanting to assess the options for an almost certain victory by Labour in the upcoming general election. Your understanding of the challenges facing the next government will be conditioned by what you have been reading in that newspaper. Unfortunately, there have been a stream of articles purporting to provide informed analysis of the challenges ahead and the capacities of the new British government to meet them which make it very hard for any progressive reader to assess the situation sensibly. These articles promote the usual macroeconomic fictions about the need for tight fiscal rules that will help the government avoid running out of money as it tries to deal with the decades of degeneration created by the austerity mindset. It is stunning how so-called progressive media commentators have so easily become willing mouthpieces for the mainstream economic lies which have only served to work against everything they purport to stand for. Business as usual though. Sadly.

Read more

IMF holds a religious gathering in Tokyo – to keep the troops in line

The IMF joint hosted a conference in Tokyo last week – Fiscal Policy and Sovereign Debt – and the continues its misinformation campaign on the ‘dangers’ of public debt. The conference claimed that it brought together ‘leading scholars and senior policymakers’ and upon examination of the agenda it was clear that there was very little diversity in the speakers. The organ started playing and all sessions sang from the same hymn sheet. That is how Groupthink works. Repeat and rinse, repeat and rinse, and, never confront views that are contrary to the message. Groupthink is about avoiding cognitive dissonance for fear that at least some of the ‘parishioners’ might lose the faith. The famous British economist, Joan Robinson likened mainstream economics to a branch of theology and these conferences that the IMF convene around the world are like evangelical crusades, to keep the troops in line so they can continue to keep all of us in line – for fear that we might all start seeing through the veil and discover the rotten core.

Read more

Senior mainstream economist now admits central banks are not as independent as many believe

The UK Guardian published quite an odd article the other day (May 30, 2024) by Mr GFC Spreadsheet Fudge Man Kenneth Rogoff – Why policymakers are more likely to risk high inflation during periods of economic uncertainty – which essentially claims that economic policy has been conducted for several years by institutions that do not meet the essential requirements that are specified by the mainstream New Keynesian macroeconomic approach, upon which the institutions have claimed justification. If that makes sense. He now claims that the eulogised principle of ‘central bank independence’, which is a mainstay of the New Keynesian justification that macroeconomic counter stabilisation policy should be left to monetary authorities and that fiscal policy should play a supporting but passive role, no longer exists as policy makers have had to come to terms with multiple crises. Of course from an Modern Monetary Theory (MMT) perspective such independence never existed and was just a ploy to allow the governments to depoliticise economic policy making and thus distance themselves, politically, from the fall out of unpopular policy interventions. If it wasn’t the IMF to blame, then it was the ‘independent’ central bank for austerity and interest rate hikes and all the rest of it. Now we have a senior Harvard professor admitting it was a ruse and bemoaning the fact.

Read more

ECB demonstrates that groupspeak is not dead in Europe – the denial continues

On February 10, 2024, a new agreement between the European Council and European Parliament was announced which proposed to reform the fiscal rules structure that has crippled the Member States of the EMU since inception. I wrote in this blog post – Latest European Union rules provide no serious reform or increased capacity to meet the actual challenges ahead (April 10, 2024) – that the changes are minimal and actually will make matters worse. Now the European Central Bank, the supposedly ‘independent’ bank that is meant to be outside the political sphere, has weighed in with its ‘two bob’s worth’ which is ‘sometimes modernised to ‘ten cents worth’) (Source), which would be overstating its value. Nothing much ever changes in the European Union. They have bound themselves up so tightly in their ‘framework’ and rules and jargon that the – Eurosclerosis – of the 1970s and 1980s looks to be a picnic relative to what besets them these days. The latest input from the ECB would be comical if it wasn’t so tragic in the way the policy makers have inflicted hardship on the people (many of them) of Europe.Today’s blog post is Part 1 of a critique of the ECB’s input into the Stability and Growth Pact reform process that is engaging European officials at present. It is really just more of the same.

Read more

Australian government proves it can end poverty, but refuses to, and is deliberately pushing more people into that state

The Australian – Productivity Commission – was created in 1998 as a result of an amalgamation between the Industry Commission (established 1990), the Bureau of Industry Economics (established 1978) and the Economic Planning Advisory Commission (established 1983). As you will read below, its antecedents go back to 1921. The Commission is one of many government-funded institutions that have undergone structural shifts over time as their initial role becomes redundant, a redundancy that reflects the changing dominant ideology of the time. It is now the government’s principal ‘free market’ think tank that spews out predictable nonsense regularly – always ending with recommendations for more deregulation and less government intervention. Its latest offering was released on Monday (May 20, 2024) – A snapshot of inequality in Australia – which, in its own words, “provides an update on the state of economic inequality in Australia, reviewing the period of the COVID-19 induced recession and recovery” with a focus on women, older people, and First Nation’s peoples. It contains some interesting analysis but falls short because its fiscal framework, upon which it makes assessments about the data that is made available, is mainstream and assumes the Australian government has financial constraints. Once they adopt that fiction, then the scope for policy is limited and we end up not solving the problems discussed.

Read more

Real wage cuts continue in Australia as profit share rises

The Annual Fiscal Statement for Australia (aka ‘The Budget’) came out last night and ordinarily I would analyse it today. But I am travelling a lot today and also the wage data came out today, so I plan to leave the fiscal policy commentary until next week when I have more time to think about the shifts in policy. Today (May 15, 2024), the Australian Bureau of Statistics released the latest – Wage Price Index, Australia – for the March-quarter 2024, which shows that the aggregate wage index rose by 4.1 per cent over the 12 months (down 0.1 point on the last quarter). In relation to the March-quarter CPI change (3.6 per cent), this result suggests that real wages achieved modest gains. However, if we use the more appropriate Employee Selected Living Cost Index as our measure of the change in purchasing power then the March-quarter result of 6.5 per cent means that real wages fell by 2.4 per cent. Even the ABS notes the SLCI is a more accurate measure of cost-of-living increases for specific groups of interest in the economy. However, most commentators will focus on the nominal wages growth relative to CPI movements, which in my view provides a misleading estimate of the situation workers are in. Further, while productivity growth is weak, the movement in real wages is such that real unit labour costs are still declining, which is equivalent to an ongoing attrition of the wages share in national income. So corporations are failing to invest the massive profits they have been earning and are also taking advantage of the current situation to push up profit mark-ups. A system that then forces tens of thousands of workers out of employment to deal with that problem is void of any decency or rationale. That is modern day Australia.

Read more

Australia’s inflation rate continues to fall yet some bank economists think further interest rate rises are possible

Yesterday (April 24, 2024), the Australian Bureau of Statistics (ABS) released the latest – Consumer Price Index, Australia – for the March-quarter 2024. The data showed that the inflation rate continues to fall – down to 3.6 per cent from 4 per cent in line with global supply trends. There is nothing in this quarterly release that would justify further interest rate rises. Despite that reality the national broadcaster has wheeled out a few bank and/or financial market economists who claim we cannot rule out further interest rate rises. That is their wish because it improves the bottom line of their companies. But it is arrant nonsense based on the reality and it is a pity that the national broadcaster cannot present a more balanced view on this.

Read more

Why is Brussels supporting Ukraine?

It’s Wednesday, and as usual I scout around various issues that I have been thinking about rather than write a consolidated analysis on one topic. Today, I consider the question of why the EU elites are spending billions supporting the Ukraine government against Russia. They claim that Russia poses a major threat to European freedom but given the superior Russian military machine has not taken much territory after 783 days of war I conclude that such narratives are fanciful and deliberately being advanced to hide true motives. I also consider the situation in the Middle East and then offer today’s music segment to restore our peace of mind.

Read more

The IMF has outlived its usefulness – by about 50 years

The IMF and the World Bank are in Washington this week for their 6 monthly meetings and the IMF are already bullying policy makers around the world with their rhetoric that continues the scaremongering about inflation. The IMF boss has told central bankers to resist pressure to drop interest rates, even though it is clear the world economy (minus the US) is slowing quickly. It is a case of the IMF repeating the errors it has made in the past. There is a plethora of evidence that shows the IMF forecasts are systematically biased – which means they keep making the same mistakes – and those mistakes are traced to the underlying deficiencies of the mainstream macroeconomic framework that they deploy. For example, when estimating the impacts of fiscal austerity they always underestimate the negative output and unemployment effects, because that framework typically claims fiscal policy is ineffective and its impacts will be offset by shifts in private sector behaviour (so-called Ricardian effects). That structure reflects the ‘free market’ ideology of the organisation and the mainstream economic theory. The problem is if the theory fails to explain reality then it is likely that the predictions will be systematically biased and poor. The problem is that the forecasts lead to policy shifts (for example, the austerity imposed on Greece) which damage human well-being when they turn out to be wrong.

Read more
Back To Top